Inside the Star

Russia moving from fossil fuel to fostering innovation

Skolkovo City, is a bold effort by Russia’s government to modernize the economy by attracting some of the world’s brightest scientific minds and most inventive high-tech firms to a 21st-century centre of excellence.

MOSCOW—In a muddy stretch of countryside on the outskirts of Moscow, workers are laying the foundations of a revolution the Kremlin hopes will reap huge profits from cutting-edge science and engineering.

They are in the early days of raising a multibillion-dollar bastion in a struggle to liberate an economy partly shackled by remnants of Soviet-era state control, corruption and a dependence on exported oil and natural resources.

It’s called Skolkovo City, a bold effort by Russia’s government to modernize the economy by attracting some of the world’s brightest scientific minds and most inventive high-tech firms to a 21st-century centre of excellence.

President Dmitry Medvedev has invested considerable political capital in the project, which will either be the most visionary enterprise in post-communist Russia or one of the most spectacular busts since the fall of the Berlin Wall.

Russia is littered with dozens of dilapidated, Soviet-era “science cities,” known as naukograds, many of which were off-limits to outsiders and often built with forced labour from political prisons. They are rusting reminders that the Kremlin has a poor record when it comes to building a modern economy around science and technology.

But Chris Erickson, whose Vancouver-based firm has been cleared by Skolkovo to invest $20 million in venture capital, says Russia is learning from the West how to support high-tech centres with government incentives that attract private money.

“Medvedev has many qualities of a Western businessperson,” said Erickson, founder of Pangaea Ventures Ltd. “He’s very knowledgeable about (California’s) Silicon Valley and venture capital.

“And I think he would very much like to see more elements of that in Russia. And Skolkovo is meant to be like a Silicon Valley of Russia.”

In what used to be the village of Skolkovo, construction workers are starting to build a city of 30,000 people. The first offices are due to open by early 2014.

A new university is to open soon after that. It will be partnered with the world’s biggest name in high-tech education — the Massachusetts Institute of Technology.

The university and firms operating in Skolkovo will focus on five fields: energy, information technology, bio-medicine, space and nuclear technology.

The goal is for half the people living in Skolkovo City to be foreign citizens, among them scientists and engineers working in research labs creating products for the world market.

Vehicles burning fossil fuels won’t be allowed on the city’s streets. Anything with an internal combustion engine will have to park in some 10,000 spaces provided just outside Skolkovo. Only electric vehicles will be allowed within city limits. Bicycles tracked by computers will be available for anyone to ride paths next to all main roads, separated from cars and trucks by curbs and safety zones.

To keep the creative juices flowing, there will be a system of linked parks and forested green belts. Homes and offices will be fully wired with high-speed Internet connections.

It would be a tall order in any country. Here, it’s a historic gamble.

If it pays off, Russia will take a great leap toward losing its reputation as a country hobbled by brain drain, cyber crooks and economic decay.

Russia’s economy is the world’s 11th largest measured by gross domestic product. The World Bank expects the economy to grow a respectable 4 per cent this year, and slow slightly in 2012.

Growth has been uneven since the Soviet Union collapsed in 1991. Regions that depend on agriculture and outdated factories lag behind those with oil and other resources.

With Europe on the brink of recession, many Russians fear a repeat of the fallout from the 2008 global financial crisis. It sent Russia’s economy into a nosedive in 2009, when GDP contracted 7.8 per cent.

Inefficient state-run enterprises still account for about half of Russia’s GDP. Another 25 per cent comes from oil and natural gas. In recent years, fossil fuels accounted for two-thirds of the nation’s exports, and revenue from energy sales made up roughly half of the federal government’s budget.

Exports are expected to increase when Russia finally enters the World Trade Organization, which is scheduled to happen next summer after 18 years of negotiations.

But there is a risk of widespread layoffs. Stiffer competition could force state-run factories to close as protective tariffs are phased out.

Lack of opportunity in other sectors of the economy and a growing sense among young people that Russian politics and society are stifling are feeding a persistent brain drain. The number of Russians eager to leave the country, especially young, educated and entrepreneurial adults, has grown from 7 per cent of the population four years ago to 22 per cent today, indicate surveys conducted by the Levada Centre.

To make matters worse, births are not keeping up with deaths, according to the World Bank, which says the country’s population contracted by .07 per cent last year.

Brain drain, a decrepit health-care system and widespread alcoholism are behind that population decline, which also saps energy from Russia’s economy.

Official statistics say Russia has about 7 million alcoholics, but experts put the real number much higher. National consumption of alcohol is about 27 litres per Russian per year, including legal and bootleg booze. (According to the OECD, the average Canadian consumes 8.2 litres.)

Endemic corruption adds more drag to the economy, scaring off foreign investors and making it harder for businesses to grow. Only 15 countries rank lower than Russia on Transparency International’s list of perceived corruption in 178 countries. (Afghanistan, Burma and Somalia are the bottom three.)

Doing business in Russia is not only difficult, it can be dangerous.

Two years ago, lawyer Sergei Magnitsky died in a Russian cell while awaiting trial on charges of tax evasion, apparently killed for investigating official complicity in widespread tax fraud.

Last month, Liberal MP Irwin Cotler introduced a bill in Parliament that would deny Canadian visas to people linked to Magnitsky’s death, along with the culprits’ family members.

Medvedev wants Skolkovo City to be clean, a place where foreigners and Russians can come together to show a better way for business and technology.

The federal government has committed just under $3 billion over the first five years of the project.

So far, Skolkovo’s Russian and foreign experts have approved 110 companies for the city. The total is expected to reach 250 in the next five weeks.

Strategic partnerships have been signed with global high-tech titans such as Intel, IBM, Microsoft, General Electric, Siemens and Boeing. For now, the foundation calls them “potential investors” that will enjoy tax breaks and other perks if they set up in Skolkovo.

Private firms have kicked in a total of $63 million, said Alexei Beltyukov, Skolkovo’s vice-president and chief development officer. Venture capitalists have committed a little over $260 million.

Private donors have pledged another $50 million to the university. It will be called the Skolkovo Institute of Science and Technology.

Half of the university funding came from Skolkovo’s president, Viktor Vekselberg, a computer engineer and oligarch who is Russia’s 10th-richest man, with an estimated net worth of $13 billion, according to Forbes magazine.

His powerful friends in Russia and abroad have been key to quickly building the project’s credibility among the high-tech elite who are essential to its success.

Last month, American Edward Crawley, 56, a Russian-speaking scientist and MIT professor who is a leading expert in commercializing space technology, signed on as president of the as-yet-unbuilt university.

Skolkovo will only work with foreign firms with Russian branches or partners.

So Pangaea, which funds clean technology and advanced materials companies, is trying to set up in Moscow, which could take months, according to Erikson.

“There’s a fair amount of paperwork to submit. In Canada, you can incorporate a company in a day if the lawyers are set up to do it. In Delaware, you can incorporate a company in a matter of probably an hour.”

To boost its chances of producing pioneering research and inventions, and attract some of the world’s smartest people, the institute will be private and protected from bureaucrats at Russia’s education ministry.

The university aims to enroll half its students from outside Russia, said Alexey Sitnikov, director of Skolkovo’s international development department.

The collaboration with MIT is an important part of that. Skolkovo’s professors can spend up to a year at MIT, “working with MIT faculty, both in labs and classrooms, including co-teaching courses as well as developing the curriculum,” Sitnikov said.

“We will not be issuing MIT diplomas, but it certainly helps us as a new, growing university. It gives us instant credibility, first of all with faculty hiring, getting good-quality professors.”

He is due to switch places next year with current Russian Prime Minister Vladimir Putin, when the former KGB agent plans to take back the president’s chair — assuming, as many Russians do, voters will let him have it.

Putin is said to be a Luddite when it comes to personal tech, while Medvedev is addicted to all things Apple.

The day before iPhone 4S went on sale, Apple Inc.’s late CEO Steve Jobs gave the Russian president one during a stop on a tour of Silicon Valley. Medvedev is also said to keep his daily agenda on an iPad.

“Putin himself does not use the Internet, and distrusts it,” Alexey Venediktov, editor-in-chief of radio station Ekho Moskvi, said in a recent lecture. “He considers it to be a zone of manipulation and disinformation, perhaps justifiably.”

In the West, when the words Russia, computers and the Internet come up, terms like hacking and cyber-crime usually aren’t far behind.

Skolkovo’s Turkot wants to change that.

In jeans and a black shirt under a yellow polo sweater, sleeves rolled to the elbows, Turkot looks like he stepped out of a Silicon Valley executive suite.

He left Russia for Israel in the 1990s, and worked for IBM in several countries before returning to Russia and launching a start-up helping companies avoid Y2K problems at the dawn of 2000.

As Skolkovo’s IT chief, he is working to harness the creative energy of Russia’s computer underclass and channel it into legitimate businesses, hopefully ones that will beat the world’s best.

That could include Google, whose co-founder Sergey Brin left Russia with his family at age 6 in 1979, reportedly to escape anti-Semitism. He has called his birthplace “Nigeria with snow.”

Turkot wants to persuade Russia’s IT geniuses-in-waiting that they can be the next to conquer the computer world — without leaving home.

Last month, he took 12 young Russian entrepreneurs to Silicon Valley. They pitched their ideas in five-minute presentations to 22 venture funds, angel investors and incubators.

Some may soon have business deals.

“I would like to show these young talents, potential hackers and criminals, that guys, you can make money and be successful — socially too — not only by committing crime, or having your dad or uncle working for a gas-oil company.

“Do it with your brains,” is Turkot’s rallying cry to the new Russia. “An engineer is in a good position to make progress in life.”